Obviously, not all financial advisors are as full of crap as I am. Many of them have the education, training, experience and certification to back up their titles. Before we get to them, let’s examine three interesting scenarios from the Boglehead’s Guide to Investing on utilizing a broker’s investment service:

Boglehead Numero Uno got burned. They were sold expensive investment that earned their brokers big fat commissions while they ate up the fees. They eventually realized that these are costly mistakes and decided to educate themselves so they can take control of their own finances.

Boglehead Numero Dos didn’t get burn. They had brokers that took care of their portfolios well, but eventually reached a point where they were capable of handling their own finances.

Bolgehead Numero Tres just didn’t deal with a broker at all. From the onset, they didn’t want to assign this important part of their life — the financial well being of themselves and their family — to a stranger. So they never used a broker or any other investment advisor.

In all of these scenario, the Bogleheads eventually became a do-it-yourself investor by educating themselves. As the book said, financial education is the key. Whether you decide to be a do-it-yourself investor or you decide to hire a broker or financial advisor, you should educate yourself before you make the choice.

To put it simply, you most likely won’t buy a car without some research. After all, a car is expensive, usually non-refundable (hah), and is an important financial decision. The same applies to choosing a financial advisor. Afterall, will you simply take the word of some douche who claims to be a financial expert extraordinaire?

The 411 on Financial Desgination (or Who’s Full of Crap and Who’s Not)

The Boglehead’s Guide to Investing points to two very noteworthy certifications: Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP).

CFAs are required to:

Have an undergraduate degree

Work in the financial field

Have either three years of professional experience involving investment decision making or four years qualified work experience.

Complete 750 hours of study (250 hours for each three levels).

Pass comprehensive exam for each level, at only one exam per year (for level 2 & 3).

CFPs are required to:

Complete approved courses before taking 10-hour long exam.

Master more than 100 financial planning topics.

Beginning of 2007, earned at least a bachelor’s degree.

CFP applicants will often enroll in extra exam prep courses due to the large number of applicants failing on the first try. As you can tell, becoming a CFA or CFP is no walk in the park. This isn’t to say that other designations are without merit, but these two certifications were pointed out by the book due to their high standards.

You may also notice that some of the designations mentioned above are tailored for specific financial situation, thus the type of training, experience and certification varies from one designation to another. To learn more about the requirements entailed for each designations, check out the National Association of Securities Dealer’s database.

How Advisors Earn Their Doughs and Why It Matters To You

Besides being familiar with an advisor’s designation, you should also be aware of how an advisor is being paid.

Take the car buying example mentioned earlier. If you head to a Hyundai dealership and the salesman proclaims that the 06 Sonata is the best car for you, will you simply take his word for it, especially since his pay is tied directly to the sales of the vehicle?

The same applies for a finance advisor. Thus, the Boglehead’s Guide to Investing advise you to stay away from commission based advisor, as there is an obvious possible conflict of interest. The book also suggest you to stay away from fee-based advisors (different than fee-only), since the structure basically contains a possible conflict of interest too.

This leaves us with fee-only advisors as a viable choice in a financial advisor. In the Boglehead’s Guide to Investing, the chapter explains briefly on the concept of the Assets Under Management (AUM) payment arrangement, but the real payment options the book suggested are the one-time fee or hourly-rate arrangement.

In these payment option, you pay for a flat one time fee for an advisor’s service, or an hourly-rate depending on the situation, a much cheaper alternative for many people compare to the AUM payment option. Because you are paying for the service entirely yourself, the advisor can better serve you objectively, as compare to commissioned-based or fee-based advisors.

More Things to Consider Before You Take the Plunge

If you haven’t realized yet, educating yourself fully about the financial advisor choice prior to receiving service is critical. Besides finding the right advisor for you, you should consider fully what you’re looking for before you set out.

Perhaps you need a better roadmap to save for your children’s colledge fund? Or maybe you have some specific questions regarding estate planning (and that financial advisor is a really hot dude). Distinguishing what you need before you buy will always be a smart and cost conscious thing to do.

Here are 10 questions to ask when you’re choosing a financial advisor, from the CFP:

What experiences do you have?

What are your qualifications?

What services do you offer?

What is your approach to financial planning?

Will you be the only person working with me?

How will I pay for your service?

How much do you typically charge?

Could anyone besides me benefit from your recommendation?

Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?

Can I have it in writing?

To get more details on each of these specific questions (including the all important 2, 6, 9), download the PDF of the brochure (347 KB).

The Chapter and Book in a Nutshell

Despite the long post, the chapter was fairly brief (around 8 pages). There are much more on the subject of financial advisor but the gist mentioned in the book was quite simple and contained all the important concept you should be aware of in the jargon-filled field of financial advisors.

Although being an beginner guide on investing, the book also contained sound advice on general personal finance. By no means is the book an end-all guide on investing, nor did it claim to be. But it’s a worthwhile read, and if you have never seriously consider taking care of your own investment, you’re bound to learn many things from this great book.

To be frank, seeking a financial advisor isn’t a stupid move when you decidedly need the service. It is only a stupid move when you grab the first advisor that comes along without doing due research. When a purchase affects your financial future, there’s no reason not to be an educated consumer.

10 Comments to “The Boglehead Guide on Investing Chapter 16 Review”

Hey Cap,
Love your posts and sorry about the ill fated romance. This was excellent and timely . Any comments on Vanguard and index funds? Off subject didnt you blog on Yodlee? Do you have the sites for the institutions that offer it? Looks like National City bank my accounts aggregate is shutting down in dec. Real bummer for a tightwad like me. Daz

on Vanguard, I don’t have an account w/ them… so you should take this with a grain of salt. but from what I’ve read, choosing to have an account at vanguard depends on what you type of investment you want. they offer a great number of low fees, no-load funds.. but you should note that starting IRAs with them can be costly (in comparison to say, fidelity), if your account doesn’t meet the current minimum requirements.

it seems vanguard has been a lesser choice (in terms of cost) for smaller investor. I think each fund w/ less than $10k in it will get a $10 yearly fee. not a whole lot in a sense, but cost is cost.

it all depends on your investment style, but since you’re asking about indexing.. it doesn’t seem like you can go wrong w/ vanguard or fidelity, especially if you meet the minimum and the expense ratio is low enough for you.

for me, I choose to go w/ index-like ETFs for my indexing needs, which works well for me because I don’t put in small amounts (say, $100 per week/month), I buy a lump sum every now and then, pay simply the cost of the trade (under $10) at discount brokers. things will of course change if my level of income change.

there’s not much to say about index funds. they’re a no frill no fuss, buy and hold snore fest. but it’s in my opinion (again, grain of salt) that you really can’t go wrong with them as a part of your portfolio.

having say that, there are obvious disadvantages. if you have all your nest eggs purely in index funds, you obviously shouldn’t expect to out perform the market (course on the flip side you shouldnt under perform the market much either). having a large amount of asset in a particular index can also lower your range of diversification, since certain index can have a high percentage of the fund on a few large companies.

at the end, you should look into asset allocation to find the right mix of stocks, bonds, index in accordance with your risk tolerance and the return on investment that you’re looking for.

also, yes I did blog about yodlee. you can check them out at their official site.

Actually, Level 1 of the CFA exam is held twice a year and not once a year as you had stated in your post. It’s offered in June and December each year. Level 2 and Level 3 are offered one a year in June.